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Technical Red Flag: The Worst Case Scenario

Not all investors put a lot of faith in technicals. But for those who do, there's a scenario under discussion that's pretty scary.

Here’s what you need to know.

If you look at the move in the S&P between February 2003 and October 2007, the S&P basically doubled, explains trader and technical watcher Guy Adami.

Then the market broke a tremendous trend line and traded down to the March 2009 lows.

If you now look at the move in the S&P between the March 2009 low and now – that trend line sits around 1205.

That doesn’t sound terribly scary; at the time of writing the S&P was well above 1300. However Adami says there’s a problem – and it’s a doozy.

According to his analysis, if Europe gets much worse the S&P will test a key level – 1292. That’s significant because 1292 has been a level of support, lately. But in the event that 1292 does not hold, Adami doesn’t see any other levels of support until 1205 - that's the doozy level.

“Whether it happens over a couple days or couple weeks, if we break 1292, we’re going to 1205,” he says adamantly.

Trader Tim Seymour agrees. “1295 has been holding – but if we break that level, the market could well cascade lower."

If that should happen, what happens at 1205 becomes extremely important. “Whether that’s a big buying opportunity or the beginning of a major shift in the market – that remains to be seen.”

Adami concedes that right now, the scenario laid out above is not the most likely scenario that plays out.

Then, why do we tell you this?

Because with the affairs of Europe growing every more precarious – the situation could change on a dime. And the scenario provides an important point of reference.

* MOST POPULAR:"Marc Faber: 100% Chance of Global Recession"Our Marc Faber article was the most viewed Fast Money post during the entire month of May. You didn't miss it, did you?


Posted by CNBC's Lee Brodie

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Trader disclosure: On May 30, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Tim Seymour is long BAC; Tim Seymour is long INTC; Guy Adami is long C; Guy Adami is long GS; Guy Adami is long INTC; Guy Adami is long AGU; Guy Adami is long MSFT; Guy Adami is long NUE; Guy Adami is long BTU; Karen Finerman is long AAPL; Karen Finerman is long BAC; Karen Finerman is long JPM; Karen Finerman is long WMT; Karen Finerman is long TGT; Karen Finerman is long RIMM; Karen Finerman is long HPQ; Karen Finerman is long GLUU; Karen Finerman is short SPY; Karen Finerman is short IWM; Karen Finerman is short MDY; Pete Najarian is long AAPL CALLS; Pete Najarian is long AAPL; Pete Najarian is long C; Pete Najarian is long MS CALLS; Pete Najarian is long INTC; Pete Najarian is long SBUX; Pete Najarian is long PEP; Pete Najarian is long HPQ; Pete Najarian is long FB

For Brad Hintz
Brad Hintz is long CME
Brad Hintz holds an equity position in MS
The following company was a non-investment banking client of Bernstein: MS
The following company was a non-investment banking client of Bernstein: GS


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